The structure of your business will have a huge bearing on the type of work you take on, how you draw your earnings, and how you work with others. Essentially, it will determine not just how quickly your organisation evolves, but how you grow over time.

There are pros and cons to every approach, especially where tax is concerned. Here, we’ve laid out some of the key things you need to consider when deciding whether to become a sole trader, set up a partnership, or register a limited company when you’re first starting out in business.

Though company structuring is an important consideration for start-ups, more established contractors or firms may want to change their status some months or years into trading. Most of the advice below will apply in these circumstances, but we would always recommend speaking to one of our Chartered certified accountants before deciding on the most appropriate way forward.

Please note that, regardless of the company structure you choose, you will be liable to register for VAT if you or your company earns more than £85,000 in 12 months.


Going into business alone

If you’re comfortable with starting your company without the support of a business partner or a board of directors, then becoming a sole trader may be your best option.

Trading alone is often well suited to creative professionals who want to work on a freelance basis, such as photographers, virtual assistants, graphic designers, web developers, marketing consultants, writers, and editors. (It’s also a popular route for construction workers.) In fact, recent surveys suggest that up to 60% of self-employed workers in the UK are registered as sole traders.


The pros of becoming a sole trader

One of the biggest benefits is in the name!

As a sole trader, you are solely responsible for the growth and development of your business. While this can feel daunting, it can actually be liberating to have complete control over who you work with and how much you earn. Plus, everything you make will belong to you; you won’t need to split your hard-earned cash with anyone else (after your overheads and tax liabilities have been accounted for, of course).

Becoming a sole trader is also often the simplest and most cost-effective way to start trading. You don’t need to pay to register with Companies House, complete reams of boring paperwork, or file your private details in the public domain; you just have to make sure you keep accurate accounting records, pay your income tax on time, and file a self-assessment every year.


Things to be aware of

  • Contrary to popular belief, it is possible for sole traders to employ staff. You will need to make sure you have all the correct procedures in place with regards to reporting PAYE and National Insurance contributions back to HMRC.
  • Many expenses, such as business travel and some of the costs associated with your premises (if you have one), will be tax-deductible. This means that the more expenses you record, the more money you can shave off your tax bill at the end of the year.
  • Because your profits will be taxed as income, you may find that you quickly enter the higher rate tax band. We covered the current income tax thresholds in our previous blog, which focused on ways you can reduce your tax liability in 2022/23, but here they are again for reference:


Tax-free personal allowance: Up to £12,570 of total income.

Basic rate tax: You will be taxed 20% on further income up to £50,270.

Higher rate tax: You will be taxed 40% on further income up to £150,000.

Additional rate tax: You will be taxed 45% on further income above £150,000.

  • Remember, as a sole trader, there’s no distinction between you and your business. If you get into debt via the business, lenders can ask that you clear it using your own personal assets.
  • Finally, bear in mind that it’s trickier to get funding as a sole trader. Lenders and investors typically prefer a more formal legal structure. So, if you know you want to expand quickly, consider exploring partnership or limited company structures.


What are the tax implications? 

As a sole trader, you’ll need to declare your profits in your self-assessment tax return, which is due by 31st January annually. This total – which you can reach by subtracting your costs and personal allowance from your sales – will be considered your personal income for that period. This figure is used to determine your income for mortgage purposes. 


Going into business with a Partner

Limited Liability Partnerships (LLPs) have been around since way before current company laws were introduced.

Under this kind of arrangement, all Partners – whether there are two or 20! – own the business and are equally responsible for any liabilities. Legally speaking, the Partnership itself is not considered a separate entity from the Partners involved.


The pros of setting up an LLP

This kind of business structure allows for everyone involved in the business to bring something to the table, which can work extremely well if there’s a good blend of personalities and experience at the helm.

It also provides less risk than a sole trader setup, without the strict management roles that need to be set out within a limited company – so from an operational perspective, it can deliver the best of both worlds.


Things to be aware of

  • You may have already set up a Partnership without knowing it! From a legal standpoint, when two or more people decide to join together in their business activities with a view to making a profit, this is considered a Partnership. You can then proceed to registering the LLP with Companies House and HMRC. This is why you should always, always create a Partnership agreement, even if you are earning relatively little between you and/or some or all of you are still employed elsewhere. This great article from SoleLegal explains the benefits of developing a proper contract in more detail.


  • Every Partner is liable to take on a percentage of any debts accrued by the Partnership. Many people are not comfortable with this and would rather keep their business finances separate from their own personal affairs.


What are the tax implications? 

As with sole traders, there’s no need for LLPs to pay corporation tax. Untaxed profits are distributed to Partners, and Partners pay tax on the value of their portion by completing their yearly self-assessment return. It’s that simple.


Setting up a limited company

If you want to minimise risk with a business structure that gives your venture its own legal identity, set up a limited company.

This is the second most popular structuring option here in the UK, largely because it creates something of a firewall between the company’s finances and its owners’ own pot of wealth.


The pros of establishing a limited company

Unlike sole traders and partnerships, limited companies have limited liabilities. They are considered to be legally separate from their Shareholders (the people who own it) and their Directors (the people who run it).

Limited companies can be assigned their own assets, like equipment, machinery, and properties – and equally, they can incur their own debts.

The crucial thing is, if a limited company gets into debt, the assets of the shareholders and directors are protected. In the worst-case scenario, they will only be liable for the amount they invested into the business into the first place (their shares).

In the same way, any legal action relating to the company’s activities would be brought against the limited company itself, not those who run it.

Because it’s a much more secure setup, banks and other funding providers are more inclined to lend to limited companies. So, if you’re looking to expand quickly, or seek investment from elsewhere, we would usually recommend registering a limited company from day one. Many larger firms also prefer to deal with limited companies instead of sole traders and partnerships, too.


Things to be aware of

  • You can set up a limited company if there is only one person working within the organisation. The individual will be named as both the shareholder and the director on the paperwork – so they will be an employer and an employee.
  • You must incorporate your limited company with Companies House, then submit your full statutory accounts and a corporation tax return to HMRC every year. If you don’t, you can be fined.
  • If you have employees, you will need to pay their PAYE (income tax) and National Insurance Contributions (NICs) to HMRC every quarter.
  • There are more duties and responsibilities associated with running a limited company. For example, as well as submitting accounts on a regular basis, directors must attend yearly meetings; develop suitable articles of association; appoint executive and non-executive directors (if applicable); manage shareholders; and generally act in a way that will promote the long-term success of the business. They are also barred from making personal profits at the company’s expense, and obliged to declare any conflict of interest that might compromise the company’s position.


What are the tax implications? 

Corporation tax will be charged on all limited company profits at a rate of 19%, so you’ll need to put nearly a fifth of your profits aside to pay this tax bill when it’s due. This rate will be increasing to 25% in April 2023. Tax benefits are available – please speak to one of our accountants to see if your business might be eligible for one or more of the schemes offered by the government.

Company directors are responsible for filing their own self-assessments and paying any income tax that’s due on the salary they have been paid, or the dividends they have drawn.


What’s the best structure for my creative business?

As you can see, there’s so much to consider when choosing the right company structure for your new venture. It’s crucial to do your research – and it’s just as vital to get advice from an experienced accountant who’s helped many entrepreneurs get on their feet.

Contact AO Accountants now for advice from a team that’s already helped to establish countless companies for creatives to date.


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